ETF for Junk Bonds

Last week, Barclays Global Investors launched the first Exchange Traded Funds (ETF) --the iShares iBoxx High Yield Corporate Bond Fund (HYG). The fund is the first one to invest in 'junk' bonds. Barclays now offers sixteen fixed-income ETFs, up from just six last year.

'Junk' bonds are those speculative securities that are rated below investment-grade and are considered risky investments. But, in the spirit of 'no risk no gain', such bonds also find investment from income-seeking individuals or institutions for their high level of yield. Some investors also buy such high-yield bonds as a tool to diversify investment portfolios. Such bonds can appreciate sharply during good economic times, when defaults are low and risk discounting is reduced. When markets gets into downturn, however, credit spreads can widen and high yield can bear the brunt.

The iShares iBoxx High Yield Corporate Bond Fund holds 50 issues and has an expense ratio of 0.5%. The fees on Barclays' other bond ETFs for the most part range between 0.15% and 0.25%. The relatively higher 0.5% expense ratio for the new ETF reflects the tougher liquidity challenges in the high-yield market.

On Friday, HYG closed at $104.25.